build a hedge fund that caters principally
to institutional investors rather than to
rich individuals. Of the rougWy one hun-
dred billion dollars invested in Bridgewa-
ter, only a small proportion comes from
wealthy families. Almost a third comes
from public pension funds, such as the
Pennsylvania Public School Employees'
Retirement System; another third comes
from corporate pension funds, such as
those at Kodak and General Motors; a
quarter comes from government-run sov-
ereign wealth funds, such as the Govern-
ment Investment Corporation of Singa-
pore. "Making money on a constant basis
is the holy grail, and Ray and Bridgewa-
ter have done that," Ng Kok-Song, the
chief investment officer of the Singapore
fund, told me. "They are consistently in-
novating-constantly soul-searching and
asking, 'Have we got this right?'" Kok-
Song went on, "I am constantly asking
myself, 'If Bridgewater is doing this,
shouldn't we be doing the same thing?' "
At some hedge funds, client service is
an afterthought. Bridgewater's investors
receive a daily newsletter, montWyperfor-
mance updates, quarterly reviews, and
conference-call briefings from Dalio and
other senior executives. "When a lot of
folks were very, very secretive, Ray could
see the value in creating something that
was more open, something that was at-
tractive to very large streams of money,"
Robert Johnson, a former senior executive
at Soros Fund Management, who now
runs the Institute for New Economic
Thinking, said to me.
Recently, the hedge-fund industry has
been shaken by allegations that it exploits
inside information. In May, Raj Rajarat-
nam, the founder of the Galleon Group,
was convicted on fourteen counts of con-
spiracy and securities fraud. Other gov-
ernment investigations are continuing, in-
cluding one involving S.A.C. Capital.
Dalio and Bridgewater don't appear to be
involved. Dalio told me that Bridgewater
hasn't received any subpoenas, adding
that he had no reason to believe that the
firm was under investigation by any
official agency.
D alio is an outdoorsman and natural-
ist of the Hemingway school: he
likes to go places and kill things. He fishes
in Canada, shoots grouse in Scotland, and
hunts big game in Mrica, with a bow-
particularly Cape buffalo, which weigh up
60 THE NEW YORKER, JULY 25, 2011
to two thousand pounds, are famouslyor-
nery, and sometimes gore hunters with
their giant horns. Naturally, Dalio sees
this as a metaphor for how he invests. "It's
always a matter of controlling risk," he ex-
plained. "Risky things are not in them-
selves risky if you understand them and
control them. If you do it randonùy and
you are sloppy about it, it can be very
risky." The key to success, he said, is
figuring out "Where is the edge? And
how do I stay the right distance from the
edge?"
One way he does it is by spreading his
bets: at any given time, the Pure Alpha
fund typically has in place about thirty or
forty different trades. "1' m always trying to
figure out my probability of knowing,"
Dalio said. "Given that 1'm never sure, I
don't want to have any concentrated bets."
Such thinking runs counter to the con-
ventional wisdom in the hedge-fund in-
dustry, which is that the only way to score
big is to bet the house. George Soros fa-
mously did this in 1992-selling short
some ten billion dollars' worth of sterling.
A few years ago, John Paulson wagered
hugely against U.S. mortgage bonds and
made several billion dollars.
Dalio is a consistent hitter of singles
and doubles-the José Reyes of Wall
Street. Among the bets the Pure Alpha
fund placed last year were long positions
in Treasury bonds, the Japanese yen, and
gold, and short positions in the euro and
European sovereign debt. A potential
problem with this type of global investing
is that these days many markets move in
the same direction, which makes it hard
to achieve real diversification. Bridgewa-
ter's solution is to place a lot of" spread"
bets, purchasing one security it considers
undervalued and selling short another
one it considers overvalued. For example,
it might buy platinum and sell silver, or
buy a thirty-year U.K. bond and sell a
ten-year bond. The returns from spread
bets tend to be uncorrelated with the
over-all market.
Other hedge funds have tried to mimic
fr
\
I
Dalio's approach, which is sometimes re-
ferred to as "portable alpha," but none
have proved as successful. The strategy
depends on an ability to outperform the
market consistently, which many econo-
mists regard as virtually impossible. Dalio
somehow seems to manage it.
At the start of the year, Bridgewater
turned bearish on U.S. bonds and built
up a short position. When the bond mar-
ket stumbled, this bet (which the firm
has since reversed) paid off handsomely,
as did wagers on commodities and
emerging-market currencies. So far in
2011, while the average hedge fund has
struggled to make any money at all, the
Pure Alpha fund is up more than ten per
cent. The bet against Treasuries gave the
lie to a criticism sometimes made of
Dalia-that he is basically a bond -market
investor, who has benefitted from a
twenty-year rally in bonds. "We have
been equally likely to be short bonds or
long bonds," he said. ''The performance of
the Pure Alpha fund is not correlated with
any asset class or any market. It has done
equally well in any environment."
What accounts for Dalio's success?
His colleague Bob Prince describes him
as "a big-picture thinker connected to a
street-smart" trader. Many economists
start at the top and work down. They
look at aggregate statistics-inflation,
unemployment, the money supply-and
figure out what the numbers mean for
particular industries, such as autos or
tech. Dalio does things the other way
around. In any market that interests him,
he identifies the buyers and sellers, esti-
mates how much they are likely to de-
mand and supply, and then looks at
whether his findings are already reflected
in the market price. If not, there may be
money to be made. In the U.S. bond
market, Bridgewater scrutinizes the
weekly U.S. Treasury auctions to see who
is buying-American banks, foreign cen-
tral banks, mutual funds, pension funds,
rival hedge funds-and who isn't. In the
commodities markets, the firm goes
through a similar exercise, trying to figure
out how much demand is coming from
corporations and how much from specu-
lators. "It all comes down to who is going
to buy and who is going to sell and for
what reasons," Dalio explained.
To guide its investments, Bridgewater
has put together hundreds of "decision
rules." These are the financial analogue of